Could value capture be the key to Melbourne's infrastructure development?

GUEST OBSERVATION

Victorian Labor in its November 2014 election transport manifesto Project 10,000 boldly announced it would “remove our 50 worst level crossings” at a cost of $5-6 billion.  They are now the government.

Grade separation of rail – elevating the track or, preferably, putting it underground in cut and cover trenches – removes congestion for both rail and road.  Higher transit speeds shrink the city. The savings available are quite substantial.

I am sure Melburnians quite like all this – provided someone else pays for it, and their personal amenity improves.

Tantalisingly, Labor alluded to ‘value capture’ as a funding mechanism:

"This engineering work requires a considerable amount of track on either side of the crossing to be submerged underground, freeing up land at ground level.

"At some locations there is likely to be an opportunity to develop this available land and ‘capture the value’ created by the removal of the level crossing.  While development opportunities will vary with each site depending on physical restraints, Victorian Labor will actively pursue appropriate development opportunities and reinvest the proceeds generated back into further improvements to the public transport system."

Those ‘appropriate development opportunities’ are the subject of a fascinating research paper, Intensifying Melbourne by the Melbourne School of Design at the University of Melbourne, looking at practical urban design opportunities – like turning waste land around rail stations into high density residential – to transform the way this city lives.

The paper is broader than rail station redevelopment, but I want to focus here because of the principles involved.

Intensifying Melbourne looks at redevelopment scenarios for Reservoir, Sunshine, Surrey Hills and Batman rail stations, all surrounded by large areas of currently unused land with the potential for high density residential. The newly-created high-value land funds undergrounding the rail, overall density increases and congestion falls – a win-win-win.

Intensifying Melbourne is astonishingly honest about the difficulties around change of this magnitude. The sobering realities are nasty and include:

• Councils are often elected to enforce the anti-development views of residents. Those in well educated, wealthy suburbs often see anything higher than two stories as gross over-development and are formidable opponents.  Governments take them on at their peril.

• The cost of trenching is triple that of raising rail lines, and many scenarios result in negative land values – the engineering cost exceeds the land value uplift.

• Reservoir and Sunshine are considered highly unattractive residential locations by planners and developers. Developers face above-average risks in realising their investment, relative to other competing opportunities. There is a genuine possibility of failure after government has spent hundreds of millions liberating land over time-frames longer than the four year electoral cycle.

I say, the problems and solutions are structural and go deeper that revealed by this analysis.  These calculations are incomplete and overlook key free-carried interests.

Labor identified major, widely dispersed congestion reduction benefits.  Large scale level crossing removal will uplift land values everywhere, as faster travel times shrink distance and cut both time and cost.

The current cultural narrative that all such benefits must accrue to land owners is the barrier.  Intensifying Melbourne sees this: “The way in which urban infrastructure investment creates capital gains and increased economic flows need to be better understood to ensure the capital gains due to public investment can be captured to fund that investment.”

This, of course, goes back to the structure of taxation.  We rely heavily on wage taxes and under-tax land.  Rebalancing this anomaly – an economically damaging imbalance imposed by major land owners on other citizens – would dramatically realign the economy toward productive activity if the beneficiary pays.

Shrinking the distance between say Narre Warren and the CBD brings important efficiencies and would permanently raise land prices along the entire corridor between.  The Victorian government has the tool to ‘value capture’ enough of the uplift to square the equation.  It is called state land tax.  Use it.

David Collyer is policy director of Prosper Australia.

David ran as a Senate candidate for the Australian Democrats in the 2013 federal election.